Canada and the Eurozone’s key central banks have taken the lead in rate cuts, putting pressure on the Federal Reserve. As one of the most closely watched economic indicators by the Fed, will the May nonfarm payrolls report shed light on the possibility of an early rate cut?
On Friday, at 20:30 Beijing time, the U.S. Department of Labor will release the May nonfarm payrolls report.
The current consensus on Wall Street is that May job growth may rebound slightly, with wage growth and the unemployment rate remaining stable, which may keep the Fed on hold regarding interest rates in June. Specifically:
– Nonfarm payrolls are expected to increase from 175,000 in the previous month to 180,000, still below the 6-month and 12-month averages of 242,000 and 234,000, respectively. Wall Street’s forecast ranges from 120,000 to 258,000.
– Average hourly earnings are expected to increase at a 3.9% year-on-year rate, unchanged from the previous month, with a month-on-month increase dropping from 0.3% to 0.2%.
– The unemployment rate is expected to remain at 3.9%, marking the 28th consecutive month below 4%.
Lydia Boussour, Senior Economist at EY, stated that this employment report will further prove that the labor market is not as strong as it was a year ago but is moving towards a balanced state with less inflationary pressure.
Market reactions will depend on the combined performance of nonfarm payrolls and wage growth data. If both data points are strong, it may lead to an increase in U.S. bond yields, putting pressure on risk assets. Conversely, if both fall below expectations, it may support U.S. bonds but could affect stock market growth prospects.
However, Goldman Sachs believes that regardless of the data, traders’ positioning may lead to an increase in risk asset prices.
Other labor market indicators ahead of the nonfarm payrolls report show mixed signals:
– Initial jobless claims remained almost unchanged during the survey period.
– ADP job additions hit a three-month low, falling below expectations.
– Employment sub-indices in both ISM manufacturing and services surveys showed slight increases, with the manufacturing index returning to expansion territory.
The Federal Reserve’s Beige Book for May indicated overall modest employment growth. Most regions reported improvements in labor supply, although some industries or regions still face shortages.
The U.S. Consumer Confidence Index shows an improved outlook for the job market in May.
Overall, these indicators suggest a lukewarm nonfarm payroll report.
Goldman Sachs, which has been overly optimistic about nonfarm data in recent months, is now becoming more cautious, expecting only a 160,000 increase in May, significantly below market expectations.
Goldman Sachs believes that when the labor market is tight, job growth tends to slow significantly in the spring hiring season (especially in May). This is because:
– Due to seasonal factors, there are usually more hires in spring, but in reality, available labor decreases when the labor market is tight, making this expectation unrealistic.
All five alternative employment growth indicators tracked by Goldman Sachs suggest that May nonfarm payrolls will be weaker, with a median of 150,000 compared to April’s 192,000.
However, given Goldman’s past track record, this suggests that actual employment data may be stronger than expected.
Morgan Stanley: Labor market still robust
Another major bank, Morgan Stanley, predicts that nonfarm payrolls will increase by 220,000 in May, significantly exceeding market consensus.
According to Morgan Stanley analyst Sam D. Coffin, employment is expected to accelerate in May, with the slowdown in April attributed to a temporary adjustment following an unusually warm winter.
Morgan Stanley believes that despite the slowdown in job growth, the labor market remains stable overall, showing no signs of significant contraction. Its report also mentioned a continued decline in job vacancies and little change in initial jobless claims.
Specifically, Morgan Stanley expects employment growth in construction and leisure and hospitality sectors to rebound, while professional and business services may experience a temporary contraction, and retail and transportation will maintain significant resilience.
Nomura: If May adds 205,000 jobs, the Fed will cut rates twice this year
Nomura’s forecast is more neutral compared to Goldman Sachs and Morgan Stanley, predicting a gain of 205,000 jobs in May.
Although this expectation is higher than previous months and market consensus, it marks a significant cooling compared to the previous months’ average. Nomura analysts David Seif and others believe this will support expectations for two rate cuts by the Fed in September and December.
However, the timing of the first rate cut will mainly depend on actual inflation conditions as long as job growth and wage growth remain stable.
The market expects the Fed to maintain the federal funds rate at 5.25%-5.50% at next week’s June rate decision.
Nomura says the public sector is the main driver of moderate acceleration in May job growth, even though public sector job growth slowed to just 8,000 in April, the slowest pace in over a year.
Is Bad News for Employment Good News for the Market?
Regarding the globally relevant question of whether bad employment news is good news for the market, Goldman Sachs trader John Flood believes the current situation remains favorable for U.S. stocks.
He provided a framework for predicting the S&P 500 index’s movement based on different job growth ranges. The results show that if job growth is between 100,000 and 150,000, the S&P 500 index will rise by 100 basis points. However, if job growth is between 150,000 and 200,000, the S&P 500 index may fluctuate by 50 basis points.
Goldman Sachs’ derivatives trader Brian Garrett’s view is more subtle. He pointed out that at the time of the nonfarm payrolls report release, S&P 500 market makers hold historically high levels of spot dollar gamma, but have net short positions on upside risks.
Goldman Sachs’ MAPS FICC department believes the U.S. bond market showed its strongest performance in three days since the end of January, suggesting that market participants have already digested expectations of slowing job growth. If the data does disappoint, U.S. bond yields may further decline.
A decline in yields may benefit risk assets and could trigger commodity trading advisors (CTAs) to close out short positions in bonds, leading to a self-reinforcing market rally.
